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United States Steel Corp. (NYSE:X)

Q3 2007 Earnings Call

October 30, 2007 2:00 pm ET

Executives

Nick Harper - Manager of Investor Relations

John Surma - Chairman and Chief Executive Officer

Gretchen Haggerty - Executive Vice-President and ChiefFinancial Officer

Analysts

Kuni Chen - Banc of AmericaSecurities

David Gagliano - Credit Suisse

John Hill - Citigroup Global Markets

Christopher Olin - Cleveland Research Company

Timna Tanners - UBS

Brett Leavy - Jefferies

Mark Parr - Keybanc Capital Markets

Aldo Mazzaferro - Goldman Sachs

Michelle Applebaum - Applebaum Research

John Tumazos - John Tumazos Independent Research

Michael Willemse - CIBC

Dave Martin - Deutsche Bank

Marty Pollack - NWQ Investment Management

Bob Richard - Longbow Research

Operator

Ladies and gentlemen, thank you for standing by andwelcome to United States Steel Corporation’s third quarter 2007 earningsconference call and webcast. (Operator Instructions). I would now like to turnthe conference over to Manager of Investor Relations, Nick Harper. Please goahead, sir.

Nick Harper

Thank you, Gail. Good afternoon and thank you,everyone, for participating in United States Steel Corporation’s third quarter2007 earnings conference call and webcast. We’ll start the call with some briefintroductory remarks from US Steel Chairman and CEO John Surma. Next, I willprovide some additional details for the third quarter. And then GretchenHaggerty, US Steel Executive Vice-President and CFO, will comment on theoutlook for the fourth quarter.

Following our prepared remarks we will be happy to takeany questions. Before we begin, however, I must caution you that today’sconference call contains forward-looking statements and that future results maydiffer materially from statements or projections made on today’s call. For yourconvenience, the forward-looking statements and risk factors that could affectthose statements are referenced at the end of our release and are included inour most recent annual report on Form 10K and updated in our quarterly reportson Form 10Q in accordance with the Safe Harbour Provisions.

Now, to begin the call here is US Steel Chairman andCEO John Surma.

John Surma

Thanks, Nick. Good afternoon, everyone. Thanks forjoining us. Earlier today, as you probably saw, we reported solid third quarterresults with earnings of $2.27 per diluted share, which includes a $27 millionpre-tax charge related to inventory acquired from Lone Star and discrete taxcharges totalling $11 million. You may recall that we discussed the potentialinventory charge on last quarter’s call. Excluding those items, if you care to,which reduced that income by $28 million or $0.23 per share, our results were$2.50 per diluted share.

From an operating perspective we’ve reported thirdquarter segment income of $433 million or $78 per tonne. A good performance,especially given the market challenges experienced in each of our operatingsegments.

Our North American flat-rolled segment had a very goodquarter with operating income of $178 million, ordinarily $50 per tonne, almostdouble what flat-rolled earned last quarter.

Our key markets were generally stable during thequarter and remain so today. And steel market fundamentals are generallypositive. Service centre inventories and flat-rolled imports have continued todecline throughout the year and are currently at relatively low levels. Veryhigh ocean freight rates, the relatively weak US dollar, high scrap prices, andthe prospects for a significant increase in the seaborne iron-ore price has uscautiously optimistic that the North American flat-rolled market could bepoised for some improvement. The North American economic outlook, of course,will be a factor in when that may occur.

These favourable trends strengthen our optimism for thelonger term, particularly since the weaker UScurrency should continue to discourage imports and favour many of our steelconsuming customers. Global raw material cost pressure only furthers ourexpectation for an eventual improvement in North American flat-rolled pricing.

We’re limited in what we can say about our pendingStelco acquisition beyond the presentation and press releases made available onour investor website that summarize the transaction and a number of otherpublic documents that have been filed recently regarding the various closingprocedures. Both parties continue to work through the remaining closingconditions and we expect the transaction will close shortly, perhaps as earlyas tomorrow. Gretchen will describe our financing plans for that transaction ina moment.

The business case for the Stelco acquisition is verystrong as the addition of the Stelco assets will allow us to expand ourcustomer base in North America, increase production atour Minnesota ore operations, andexpand our supply chain in providing semi-finished steel to our flat-rolled andtubular finishing facilities in the US.

The potential synergies are significant, especially aswe better utilize and balance our low-cost raw materials, and ourgeographically dispersed raw steel and finishing facilities to serve anexpanded North American customer base. We have teams in place working onintegration process to ensure we can generate the more than $100 million of runrate (sic) synergies by the end of 2008.

Our third quarter European segment operating income of$152 million or nearly $105 per tonne continues our string of strong results.We did have higher raw material and outage costs and reduced shipments andproduction associated with blast furnace outages, including our Serbian blastfurnace major rebuild project, and of course the normal European summer pause.The European market remains reasonably firm, especially in the central Europeanquarter where we ship the majority of our product.

Unprecedented levels of flat-rolled imports,particularly from China,have resulted in higher than optimum customer inventory levels and somepressure on spot prices and order rates. You may have noticed just yesterday Eurofer, the European Steel ProducersAssociation, initiated trade action against unfairly traded imports ofhot-dipped galvanized product from China.We are members of Eurofer and we support this action.

Recently we had the formal dedication of our newautomotive galvanizing line in Slovakia.As evidenced by the number of important customers, public officials, and otherdignitaries in attendance, this project is a high profile investment in theregion. I want to thank everyone involved for their hard work in bringing thenew line to on-time completion. We look forward to increasing our participationwith the automotive and appliance manufacturers in the region and to securinggreater contract business volumes in 2008.

Also in Slovakia,we recently announced a voluntary early retirement program. Employees who electthis program will terminate their employment prior to the end of 2008. We anticipatethe program will generate substantial future cost savings through long-termproductivity improvements. We will not know the employee response to theprogram and the amount of the resulting fourth-quarter charge until later inthe year.

Now turning to our tubular segment, excluding theinventory charge I mentioned earlier, we earned $74 million or $156 per tonneshipments on shipments of 473,000 tonnes. Shipments and costs increased duringthe quarter as continue to integrate the operations acquired from Lone Starinto the US steel supply chain and establish our unified business model.

Average proceeds were lower as prices for energy marketproducts trended lower and a larger share of our overall product mix was weldedproduct, which is generally at a lower price than seamless.

Our tubular distributors continue to focus on inventorymanagement during the quarter with high levels of inventory and imports,particularly from China,weighing on domestic shipments and prices.

With the Lone Star acquisition we’re now the largestsupplier of OCTG product in North America. We’veestablished a new distribution network with a limited number of authorizeddistributors and we are shifting to a made-to-order business model. The newdistribution network could allow us and our customers to improve management ofinventory and production across the business cycle, and it will also allow usto enhance our relationships with end users of our product.

The integration process is well under way and we are onphase to generate at least $100 million of annual run-rate synergies by the endof 2008. The primary source of the synergies will be semi-finished steel supplyas we integrate the assets acquired from Lone Star into the US steel supplychain for hot-rolled product.

Additional benefits include leveraging procurement andbest practices, and overhead reductions. Along these lines, in September wepermanently closed the two small electric arc furnaces and rolling mills in East Texas. The full benefit to these actions will be recognized in2008.

In summary, the third quarter was a very active andproductive period for US Steel. With the Stelco acquisition, progress on theLone Star integration, and the dedication of our new galvanizing line in Europe,we have taken major steps to improve each of our main business segments.

Now I’ll turn the call over to Nick for some additionalinformation about the quarter’s results. Nick.

Nick Harper

Thank you, John. Capital spending, which is detailed bysegment in the earnings release, totalled $210 million in the third quarter.Our current plan for 2007 has total capital spending at approximately $725million with $521 million for North American operations and $205 million forEuropean operations.

Depreciation, depletion, and amortization totalled $124million in the third quarter and is expected to be about $475 million for theyear, recognizing the increase related to Lone Star, but excluding any effectsfrom Stelco.

The fine benefit and multi-employer pension and OPECcosts for the quarter totalled $64 million. We made cash payments of $91 millionfor benefits, primarily for retiree health care, during the third quarter. Alsoduring the third quarter, we made a $70 million voluntary contribution to ourmain defined benefit pension plan bringing our year-to-date voluntary pensioncontribution to $140 million. Additional detail will be included on our 10Q,which should be filed later today.

Net interest and other financial costs totalled $22million in the third quarter and we expect fourth quarter net interest expenseto be about $20 million, which excludes foreign currency gains or losses andfinancing activities related to the Stelco acquisition.

Our estimated annual tax credit (sic) for 2007 will bedetermined based on domestic results taxed at the statutory rate of about 38%and Slovakian earnings taxed at a flat 9.5%. This rate in the first three quartersof 2007 was about 17%. During 2008 we expect to fully utilize the tax creditthat has been available since we purchased USSK in 2000. This will result in ahigher effective tax rate in 2008 and subsequent years. This matter is coveredin more detail in our 10Q.

Lastly for the quarter, we averaged 119 million fullydiluted outstanding shares. Now Gretchen will review some additionalinformation in the outlook for the fourth quarter.

GretchenHaggerty

Thank you, Nick. Our cash flow’s been strong so farthis year with cash flow provided by operating activities of $1.354 billion.Excluding the Lone Star acquisition, our free cash flow after capital spendingand dividends, but before external financing, was $852 million. We ended thequarter with $1.4 billion of cash and about $2.8 billion of total liquidity.

As we’ve mentioned before, of course, we continue toaccrue profit-based liability to be used to assist National Steel retirees withhealth care costs that have not yet been paid because the trust has not yetbeen established. As of the end of the third quarter the accrued liability forthis was $462 million, including interest.

As Nick mentioned earlier, during the third quarter wevoluntarily contributed another $70 million to our main pension plan bringingour year-to-date total to $140 million, which is what we had forecast for theentire year. In addition, upon closing the Stelco acquisition, we havecommitted to make a pension contribution of $32.5 million Canadian to the mainStelco pension plan. Since the beginning of 2004 we have voluntarilycontributed $865 million to US Steels domestic benefits plan.

As noted in the earnings release, we repurchased285,000 shares of common stock in the third quarter for a total cost of $28million. This brings our total repurchased to 14 million shares orapproximately $750 million and represents more than 10% of the balance of fullydiluted shares outstanding when we authorized the original repurchase programin July of 2005. We have 7 million shares remaining for repurchase under the currentauthorization.

As discussed in our Stelco conference call, we intendto finance the Stelco acquisition through a combination of cash on hand andutilization of certain existing liquidity facilities. In preparation for theclosing we have drawn $400 million on our receivables purchase agreement, aswell as $900 million under two new syndicated credit facilities; a $400 millionone-year term loan and a $500 million three-year amortizing term facility. Wemay access the debt capital markets to refund a portion of these facilities. Atclosing, we intend to retire the majority of Stelco’s outstanding debt; a $150million Canadian dollar note from the Province of Ontario will remain outstanding.

Turning to our outlook, for the fourth quarter weexpect a decline in overall results mainly due to normal seasonal affects andseveral scheduled blast furnace outages. The planned blast furnace outages inboth United Statesand Europe will impact shipment levels and costs.Results for Stelco will be included in our flat-rolled segment as of the dateof the acquisition and our fourth quarter outlook does not reflect the effectof including the Stelco operation.

In the flat-rolled segment we expect results to bedecline in the fourth quarter due primarily to lower shipments and higher rawmaterial outage and modernization-related costs. Average realized prices areexpected to remain in line with the third quarter.

For US Steel Europe we expect fourth quarter Europeanresults to decrease. Prices in shipments are expected to remain comparable tothe third quarter level and costs are expected to increase slightly. We havetwo planned blast furnace outages that will continue to limit raw steelproduction.

Fourth quarter results for tubular are expected to beconsistent with third quarter results as the benefit of higher prices and lowercost are expected to be off-set by lower shipments, reflecting continued highinventory levels and year-end seasonal sets. Nick.

Nick Harper

Gail, could you please cue the line for questions?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Our first questionwill come from Kuni Chen with Banc of America Securities. Please go ahead.

Kuni Chen – Bancof America Securities

Hi, good morning, everyone.

All

Hi, Kuni.

Kuni Chen – Bancof America Securities

Hey, John, just had a question for you on Europe.The market’s obviously going through some inventory destocking. How long do youthink it takes for the European market to get back to equilibrium as that of,you know, one to two quarter type issue or do you think it takes longer thanthat? And can you also talk about some of the mix shifts that you’re seeing inyour business over in Europe?

John Surma

Sure. I’ll take the latter one first. The overall mixhas been relatively constant. It just depends on what facilities we’re doingwork on. Serbiawould be our heaviest sort of spot market, hot-rolled business that’s been ofnecessity a little bit lighter just because we haven’t made as much metal therein the last month or two or three because of the blast furnace outages. So Ithink in general the mix has been relatively constant subject to just facilitychanges.

And then with the new galvanizing line coming up, ofcourse that’ll begin to move more of our business to (a) to coated and (b) tocontract, but that’ll take place gradually over probably a few years time,quarter by quarter.

On the overall outlook, it’s hard to say. I’ve observedover the last couple of years that the European market perhaps follows asomewhat delayed pattern of what we see in the North American market that maybeis playing out here again. The North American market is in a position whereinventories have been drawn down to a relatively low level and now we’re justsort of moving into that phase perhaps in Europe. My guess is that it could beprobably a quarter or two before we move back into a somewhat stronger positionin Europe. But the underlying consumption still looksquite good, particularly where we are in central and moving toward the east. Theseal consuming economies there are quite strong for infrastructure, housing andthen eventually for a more consumer oriented kind of a book. So my sense isthat it’s a little ways out, but not very, very far away.

Kuni Chen – Bancof America Securities

Okay, great. That’s helpful. And then one quick followup, if I may, probably for Gretchen or Nick. Just on the outages in the fourthquarter, can you quantify either in tonnes or days production what that meansin the US andin Europe.

Nick Harper

Let me just give you a couple of general comments. Ithink as the outlook said, I think our shipment level in Europein the fourth quarter we expect to be about the same. We had some outageproduction effects in the third quarter and we’ll have some in the fourthquarter. I don’t know that we see a significant difference between the two.Gretchen, I’ll let you add on to that.

GretchenHaggerty

Yeah. I mean, I think on the flat-rolled side we werelooking at maybe $10 to $20 million additional outages.

Nick Harper

In the US.

GretchenHaggerty

In the USon flat-rolled. As far as, you know, there’ll be a bit more in tubular, but notat that kind of a level. And then on the European side, you know, maybe aboutthe same as the third quarter when you get it all said and done. There’s not asignificant change from what we’ve got in the third quarter.

Nick Harper

Yeah, I think in the USwe have on the blast furnace side three outages scheduled and these are allscheduled for a variety of reasons. None of major duration. They’re all, youknow, one, two, three week kind of projects. At least, that’s how they’replanned. Sometimes they’re longer, sometimes they’re shorter, but I think thenumber Gretchen gave you on a direct-cost basis, 10 to 20 for North America is probably not a bad number. In EuropeI think relatively flat and tubular fairly small. The only difference I wouldsay is in the US the extent that we have those direct costs, that’s one thing,but our overall capacity utilization, which was up and very beneficial in thethird quarter might reflect down a bit in the fourth quarter.

Kuni Chen – Bancof America Securities

Okay. That’s very helpful. Thanks a lot guys.

John Surma

Thanks, Kuni.

Operator

And we’ll now go to Brett Leavy with Jeffrey andCompany. Go ahead, please.

Brett Leavy –Jeffrey & Co.

Hey, guys. It seems at this point that it may be moreattractive to build than to buy. Can you guys sort of comment on that premiseand talk a little bit about what geographies and what product areas might beinteresting to you going forward?

John Surma

Sure. I’ll try. I think if you’re calculating whatbuild costs are and what implied market values are per tonne, that’s certainlya much closer calculation than it might have been five or six years ago. Weacquired the national assets, I think, for less than $200 per tonne, if Irecall, and certainly that placement cost is many times that. Today thosenumbers are probably a little bit closer. We haven’t been particularly temptedin that regard just yet, although we can see that North Americamight be due to (inaudible) because of some of the macro effects that I talkedabout.

I think in terms of regions, I mean, the higher steelconsuming regions that will have increasing intensity are likely to be the moredeveloping countries. Certainly Latin America withresource base is very attractive. Some of the CIS countries with resource baseis very attractive. And naturally some of the growing Asian economies. But interms of our direct dissipation grain field in that regard, I think for usthat’s probably a little ways out. I think we’re more focused on the things wehave or will shortly have with Stelco and trying to take advantage of what wesee in North America as a very favourable long-termeconomic position here.

Brett Leavy – Jeffrey& Co.

And then can you talk about your outlook at this point?Obviously some of the iron-ore guys have kind of fired a shot across the bowand talked about 50% increases in iron-ore in the press. Obviously we won’tknow for sure until it’s all negotiated in January. Can you talk about youroutlook for some of the key raw material costs as you go into 2008? Iron-orescrap, etcetera.

John Surma

Sure. Just to tick a few off, I think you all read thesame thing as we do from a variety of sources about the seaborne iron-ore andall the signs, including very high spot prices out of India in particular intoChina suggest that there’s room for a pretty substantial increase where the bigbuyers in China and Asia and where the big sellers in Australia and LatinAmerica come out on that, I really don’t know, but all the signs I think pointto quite a healthy increase.

From a coal standpoint, seaborne coal looks like itsmaybe a little bit tight, but in our position in North American Coal and the AppalachianBasin I think the overall market looks reasonably well balanced. We’ll probablyhave a couple of dollars per tonne of increase. We’ve got most of that alreadytaken care of contractually next year compared to this year. In Europeour coal situation likewise, I think, is in reasonable position, although theremay be a slightly larger increase there.

To the extent anybody’s buying coke, and we do, both inEurope and North America I thinkthe seaborne coke market, which is a fair market, is quite tight right nowbecause of maybe not quite as much coke coming out of China.I think that’s a market which is likely to stay relatively tight. It’s ebbedand flowed the last few years, but right now it probably looks fairly tight.And then in our own book we see that for furnace additions, by that I mean molybdenumand ferromanganese and that entire group of additions, that’s been a fairlytight market as well and those probably should continue to tighten in the nextyear.

Operator

And we’ll go to David Gagliano with Credit Suisse.Please go ahead.

David Gagliano –Credit Suisse

Hi. My question is related to your annual autocontracts for 2008. There’s been a fair bit of commentary in the trade ragslately just regarding some early posturing out of Europefor 2008. And the indications seem to be pointing for the auto makers, sorry,the steel makers pushing for a 20% list in auto contractors while the automakers are actually trying to limit it to a 10% list. So my questions are, isthat in your view a reasonable starting point for your negotiations in Europeand in the USfor 2008?

John Surma

Well, we’re in that process right now and working ourway through that. Some completed and some not so yet. As you know, I don’t liketo negotiate with important customers in this particular venue. But having saidthat, as I just went through the cost pressures which we have to contend with,and I think our expectation is we proceed in a discussion with an expectationthat we want to maintain and if possible improve our margins in the face ofthat cost pressure, which there’s a variety of reports about how much that willbe per tonne. Those kind of percentages you talked about seem to me to be notoutlandish, but I don’t want to go into any specific details because we’restill in that process right now. But when it’s all said and done we wouldexpect to see some improvement in our overall contract price book next year.

David Gagliano –Credit Suisse

Great. Thanks. That’s very helpful. And then just as afollow up, regarding the tubular business. First, I was just wondering aboutthe magnitude of the expected volume decline in the fourth quarter.

And then secondly, if you could just share yourthoughts with regards to how long you think it’ll take for the tubularinventory overhang to work its way through the system. Thanks very much.

John Surma

Sure. The overall picture, I think, in not just CTG,but also standard in line has been characterized by heavy imports andrelatively high inventories. The underlying consumption has been pretty goodwith gas and oil prices where they are and the amount of drilling activitywhich one can observe, and the amount of line pipe activity for water and gasand all the things that also moves into our flat-rolled business. Theunderlying consumption is pretty good. The issue really is a full inventorypipeline, no pun intended, and a lot more imports than would like.

The imports from Chinaare a particular concern. There’s a number of trade actions under way there, asyou know, and maybe more to come. Just recently we might have observed just aslight bit of leveling in imports, including maybe some from China.There’s reports of perhaps additional export tax actions coming out of China.All that would be positive. We’re not counting on it, but it certainly would bepositive.

All that means to us is that the underlying consumptionis good, we’re going to gear our production to what our customers need, whichis how we run our flat-rolled business, as you know. And if that means it’sthrough the end of this quarter into the early part of next year before thingsstart to tighten up a little bit and get back to a more reasonable equilibrium,so be it. We’ll make what our customers need. Until then, I’ll let Gretchencomment on what the overall shipment effect might be.

GretchenHaggerty

You know, I think just what we tried to say in ouroutlook was that we are expecting higher prices and lower costs to be offset byshipments. Depending on how those, you know, that could lead you to a littlebit more neutral kind of quarter-to-quarter effect. I think as far as shipmentsgo, you know, I don’t think we want to be predicting what they are. I think wejust wanted to kind of guide you that we had some favourable things and someunfavourable things.

John Surma

Yeah, that would depend on, and this is a particularmarket where the lead times are very, very short, so I mean, we’re making ourown view of what shipments would be. We’ve got it toward, being a little bit onthe lighter side. But the key point is we’re going to make what our customersneed and the longer that this inventory bulge takes to work off then the littlelighter our shipments would be.

GretchenHaggerty

And John, you might want to just talk a little bitabout the, you know, moving to kind of a unified model and how we approach thatbecause that is going to have a tendency on extending lead time somewhat forsome of the customers that may have purchased from Lone Star before. It’s justa little different approach.

John Surma

Yeah, we are, as Gretchen points out, we’re going moreto a made-to-order kind of system. We don’t like having a lot of pipe stackedand collecting inventory when we don’t really need to. I think Lone Star as asteel shore company with no supply, I understand they had a much longer supplyline. Our supply line is much, much shorter and as we transition through thatwe have to take some inventory out of the system and as a result we may not behaving to make as much in the near term. So those are a lot of different datapoints, but I think the conclusion would be it’ll take a little bit more timeto work all the inventory down.

David Gagliano –Credit Suisse

Okay. Thanks very much.

Operator

And we’ll go to John Hill with Citi. Please go ahead.

John Hill –Citigroup Global Markets

Yes. Thanks, as always, for a very detailed conferencecall. It seems that observers in steel have been calling for some time for thistight supply chain to translate into better market conditions, lower imports onthe flat-rolled side, service centers, etcetera. Now it seems that just becauseof the small matter of a global financial pandemic this has been pushed outseveral months. But I was just curious, for the record, do you see that thesedrivers are still in place? Do you believe that the recovery case for steelinto early ’08 is intact? Or should we be thinking about there’s some darkerclouds over that?

John Surma

John, I think you have to look a little bit at theoverall economic outlook. As I said, our third quarter flat-rolled results,which are not a bad indication of how industrial activity was, were quite goodconsidering the fact that the economy wasn’t exactly going gang crushes in thethird quarter. The numbers are pretty clear, the overall service inventoriesare low. Getting down to the kind of levels that the last two low levelsattained.

Imports have trended down and look to be continuing todo so, and that makes economic sense because of the freight rates and theoverall dollars. So I think we’re set up to have a response in pricing andperhaps in restocking. But all of our customers, be they distributors orconverters or OEMs, they’re all cautious because they’re not quite sure wherethe market’s going or the economy’s going either.

As soon as we see, and I hope we do see soon, somereasonable stability in the economy and maybe a slightly brighter outlook andwhether that goes from consumer all the way back to industrial, then I thinkthe factors are all in place to have a fairly decent response, which would bealong the lines of the response we saw the last two or three cycles. But Iwould just take it back to some reasonable comfort about the overall economicoutlook I think will translate into progress in this market pretty quickly.

John Hill –Citigroup Global Markets

Yeah. Great perspective, great perspective. And thenperhaps a bit narrower question. Just on the subject of mill level inventories.We’ve seen in other corners of the steel world service centers inventories comedown, but then suddenly mysterious mill level inventories surface and derailthe story. Obviously there was some overhang, a USdealer with some pipe supposedly that was scrapped. That’s a different matterthan the steel mills, but can you provide us some comfort that US Steel ismaking to order and thin on the ground?

John Surma

Yeah, we always do. And our inventories have actuallybeen drawn down. Gretchen commented on all of the strong cash flow that’s comeout of inventory and we continue to keep very, very tight control over that. Wehave no interest in making slab or band to put it on the ground and wait forsomeone to take it away. So from a mill flat-rolled standpoint in North America and in Europe our inventories arelower than they typically have been. I think the tubular situation, again, isadjusting what we acquired into the kind of more of a pull than a pushmethodology that we prefer to have and we intend to get there as soon as wecan.

The product, the pipe you referred to, was reallyproduct that understandably might have been there under a different model. Wedon’t really think it’s the right product to have going out with our name onit, therefore we thought that not having it on the market was the better thingto do.

Operator

Now we go to Chris Olin with Cleveland Research. Pleasego ahead.

Christopher Olin– Cleveland Research Company

Hi, Jack. Tell me a little bit about what you’re seeingin terms of the Asian tubular quality coming in. I know there’s been some kindof press that there’s been some bad product being shipped into the country andwhether or not that could drive a faster recovery in the market.

John Surma

Everything you read is true. The quality, I mean, a lotof it was on structural things that we might not be as much involved in, but wecertainly observe. But even into standard line of SVTG (sic), I think thatquality is spotty and questionable and not of a quality that we’re comfortablein putting into our supply chain to the important customers that we serve. AndI would hope that the more discerning customers would take note of that andthen that might give us a little bit of an assist. That of course implies thatthat gets all the way back to Chinaand they stop sending it this way. I’d prefer that market forces would allowthat to happen as opposed to other means, but that may well be what happens.But there’s no doubt that the quality of a lot of the product coming that wayis not up to the standards that we would apply to ourselves.

Christopher Olin– Cleveland Research Company

But you’re not seeing any kind of change in shares sincethis began to develop?

John Surma

Well, you know, this hasn’t been all that long. I thinkthese kind of trends take a little bit longer to play out. So I’m reluctant tosay we see a trend or anything else. I mean, all we’re talking about here isreally episodic comments that we pick up in the trade, but not long enough nowto really see a trend.

Christopher Olin– Cleveland Research Company

Okay. Just one more question. Considering you had todestroy some product at the Lone Star facilities, were there any, I guess,higher than usual shipments between the flat-rolled and tubular businesses tokind of offset that?

John Surma

Not yet. And had to, just to be clear, we chose to dothat because we didn’t think the product was suitable for the kind of businesswe want to run. So I just make that slight amendment.

There was a variety of other material on the ground inthese Texas, slab, and band.Again, a much longer supply chain because of the lack of a committed steelsupply. So we’re working through that. But most of that was okay. Some was not,but most of it was okay. We’re just now getting linked up with Granite City and Fairfieldand Gary and we had some steel flowfrom our traditional USsteel plants in East Texas and the third quarter. A bitmore in the fourth quarter and we’ll begin to hit, I think, a better stridenext year on that.

GretchenHaggerty

That was part of the reason for our improvement in thethird quarter in flat-rolled versus second quarter.

John Surma

Right.

Operator

And we’ll go to Michael Gambardella with J. P. Morgan.Please go ahead.

MichaelGambardella – J. P. Morgan Securities

Yes. Good afternoon.

John Surma

Hi, Mike.

MichaelGambardella – J. P. Morgan Securities

I have a question. You’ve been looking for raw materialacquisitions in Europe. Any progress there?

John Surma

No. We’re really looking for a raw material positionand that could be anywhere from an acquisition to an equity interest to somedifferent type of contractual arrangement. But nothing yet. We continue toexplore that, but nothing that has got to the point of coming close to fruitionor that we could talk about and explain to you. We do have excellentrelationships with all of our suppliers there and we have a variety ofdifferent sources. They’ve been good suppliers, but for the moment they’re justsuppliers and we’re just customers.

MichaelGambardella – J. P. Morgan Securities

And do you have any planned outages for the firstquarter?

John Surma

None that we’re prepared to talk about now. I mean,those plans come together over a period of time and we’re just looking now atour schedule. Some of these things we can vary depending on what we see in themarket. Mostly what we’re doing in the fourth quarter has been planned justbecause they have to get done and it’s traditionally a good time to do it for avariety of reasons. But nothing of consequence that I can think of right now,Mike, that we’d be prepared to talk about.

GretchenHaggerty

We do generally tend to do work at our iron-oreoperations in the first quarter because of, you know, just the seasonal effectsup there.

John Surma

Yeah, we do normally our major outages on the equipmentin Minnesota in the firstquarter. I think if you just look at other businesses results quarter byquarter I think that’s pretty evident and my guess is we’ll do it exactly thesame way.

MichaelGambardella – J. P. Morgan Securities

When will tubular be done with running throughpurchased slabs through their production?

John Surma

Oh, I think by the end of this year we ought to be inpretty good shape and be on a supply line back to our traditional US Steelplants. Maybe not 100%, but the majority of it should be worked through and weought to be on the kind of supply chain we’re looking for probably by the endof this year.

MichaelGambardella – J. P. Morgan Securities

All right. And last question. John, were you surprisedthat ThyssenKrupp and Minnesota Steel, you know, appear to be going forwardwith their projects in the US?

John Surma

Not necessarily, Mike. I mean, I think in the instanceof the plant in Alabama, eventhough we think the level of state support for that is a little bit beyond whatmight have been appropriate, that’s not my business to comment on. That’s acommercial decision by people who have capital and they want to take a risk andlet the best company win. The fact that their view must be that the NorthAmerican flat-rolled market has some growth prospects and that the overallsteel consuming industries in the US have a decent chance of succeeding overtime, that’s not much different than our view. If they want to take a risk andinvest capital, that’s one thing.

The one in MinnesotaI think is a different calculation and one that I’m really not prepared to saymuch on. Just to observe it’s still fairly early in that process and we’ll haveto see how it plays out. But I think the extent that any investment in steel inNorth America reflects the view that the overall marketis designed to be a decent market over time with some reasonable underlyinggrowth in overall consumption. We see the same thing that the weaker US dollarwill tend to favour the companies who consume steel globally. That’s alsoprobably something we would agree on. And as long as they’re all commercialmarket-based decisions by commercial market-based companies, that’s the waylife goes.

Operator

And we’ll go to Timna Tanners with UBS. Please goahead.

Timna Tanners –UBS

Yeah, hi, good afternoon.

John Surma

Hi, Timna.

Timna Tanners –UBS

I wanted to ask for a little bit more detail on the flat-rolledproducts results, which was quite impressive. On the cost side you saw a $30per tonne reduction from which has been kind of consistent, at least in thefirst two quarters. Could you give a bit more detail there because it’s prettyimportant and just to highlight how that can be continued going forward?

John Surma

Sure. Among other things, Timna, if you just look atthe overall capacity utilization we picked up from 85 to almost 89. That’s apretty substantial increase in raw steel capability utilization. You know,those incremental tonnes come at a zero fixed cost or near the zero fixed cost,so the incremental tonne for us is quite a competitive tonne because we’reconsuming pallets that we’re manufacturing at a very competitive price, as well.So overall the incremental utilization is very, very cost effective for us andpart of that is, I think Gretchen commented on it earlier, was for steelflowing towards Texas with the Lone Star acquisition we’ll see more of that.Otherwise I think we just ran our facilities quite well and we put a lot ofcapital, particularly into the blast furnace, as that’s where the cost reallyusually the battles fought and our blast furnace capability was fairly high andour facilities ran quite well.

I’d point out that the performance is more impressivewhen one considers that we did experience some increases for purchase coke. Themarket there is tightening. And also for a variety of furnace additions. As Isaid, molybdenum and all the other furnace additions. Those were prettysubstantial increases. So we overcame that and more than overcame that and ourcosts actually were driven down largely by the overall higher utilization in amarket that was just okay. So I think our performance in the flat-rolledbusiness demonstrates what we can do.

Timna Tanners –UBS

In the third quarter you produced almost exactly whatyou produced in the second quarter. Is there something I’m missing onutilization?

John Surma

Well, our utilization in the flat-rolled business inthe second quarter North America I think was about 85%and we were now up to almost 89%, I think, in the third quarter. So our rawsteel production was 4.1 million up to 4.3 million. So we did produce a littlebit more.

Timna Tanners –UBS

Okay. So I’m looking at shipment date. I should belooking at –

John Surma

Yeah, the raw steel capacity really gives you the costnumber you’re looking for.

Timna Tanners –UBS

Gotcha. Okay then. Finally, if you could give –

John Surma

Oops. I’m afraid we lost Timna. Hello?

GretchenHaggerty

I think we lost you Timna.

Timna Tanners –UBS

Okay.

GretchenHaggerty

There you are.

Timna Tanners –UBS

Sorry. I’ve been here the whole time. That’s strange.I’m just trying to get a little colour form what your customers are saying. Ifyou could just give us an update. Is there any recovery yet or is it too soonon some of the appliance and auto end markets? Is there anything changingthere?

John Surma

Sure. As I said, I think our markets during the quarterwere just stable. Some were more active than others. Those involved in the(inaudible) for example, were fairly strong, reflecting the water transmissionenergy industry. Those were quite good. Automotive was just moderate. A littlebit up, a little bit down, depending on the customer. We’re very widelydiversified across the customer groups. Those that are more aligned withconsumer behaviour, like fly-ins and HVAC that reflect somewhat with what thehousing market has done, we’re not as strong. Although not bad.

I think in general our markets were stable and I wouldsay they’re stable going into this quarter. And the overwriting comment I wouldgive is that our customers are cautious in keeping inventories very tight andvery low. And while that doesn’t make us feel great, it does fly that when, Ihope when the US economy begins to do a little bit better then I think theposition is set up to have a pretty good response.

Operator

And we’ll go to Mark Parr with Keybanc’s. Go ahead.

Mark Parr –Keybanc Capital Markets

Thanks very much. Good afternoon.

John Surma

Hi, Mark.

Mark Parr –Keybanc Capital Markets

A couple of questions. First related to Lone Star. Ifyou exclude the $27 million in non-operating charges, did Lone Star contributeto the quarter or was it a net cost?

John Surma

No, it did, although that’s getting harder for us tofigure out because we’re not necessarily keeping separate score anymore. Imean, we have now really during the quarter established an overall two meter(sic) business unit. I think there was, I’m sure, some moderate positiveincome. But now with the closure of the small electrics and the rolling millswe’ve taken a big chunk of the high cost structure out and we’re really teed upto I think perform quite well. So therewas a moderate profit but we are not really keeping score that way anymore.

Mark Parr –Keybanc Capital Markets

Along the lines of your entire M&A orientation herein the second half of ‘07. In the thirdquarter, were there any unusual costs associated say with due diligence onStelco or with banking fees or any unusual SG&A associated with M&Athat you could quantify?

GretchenHaggerty

I don’t think anything that is worth commenting onreally, Mark. I mean a lot of that’sgoing to go into the acquisition cost. We have to sort that out as part of our purchase when we finally makeit. I don’t really think there isanything that worth talking about there.

Mark Parr –Keybanc Capital Markets

Okay. So I hadjust a couple other questions. Onerelated to the European market. John,you talked about EUROFER filling a formal complaint this week. Have you or has the marketing organization inCentral Europe seen any reduction in availability ofChinese bans in the last say month or so?

John Surma

It’s hard to get good data on that; it would only beanecdotal and I don’t know that we have seen anything, I mean as of at leastyesterday, the last time I talked to our team there I think the product flowshave been pretty brisk and that’s one of the reasons why these trade actionswere brought. There has been a lot ofdiscussion at senior policy levels as well from Europeas I am sure you follow in the trade press. But I don’t know that I could tell you we have seen anything ofconsequence yet, pretty soon for that.

Mark Parr –Keybanc Capital Markets

Are there any meaningful differences between theanti-dumping process in Europe versus the U.S.that we need to be aware of as far as watching how this process could unfold?

John Surma

Well, I am sure there is, but I am pleased to reportthat I don’t really know either of the two processes really well and I mean Ithink it’s similar in the same kinds of things about low cost and subsidizationand injury and those kind of things, but I am not intimate enough with thedetails to really be much good on that, I am afraid.

Operator

Your next question comes from Aldo Mazzaferro - GoldmanSachs.

Aldo Mazzaferro- Goldman Sachs

In your European operations, John, could you comment alittle bit about what you seeing in terms of the make-up of the types ofimports that are coming in? I know youcommented on China. I am wondering whether there are othergeographic regions that are sending steel there?

I would assume that the market is getting a littletighter given the strong currency and how it’s attracting supply, but could youcomment on how your cost structure, you think, compares to the delivery costsof some of those imports that you are seeing today?

John Surma

The big importers into the EU 27 on the flat side, ofcourse, Chinais now by far the largest importer and I think by my numbers just through thefirst eight months, Chinais well over 5 million tons for the first eight months, which isunprecedented. I think the previous yearmight have been comparable period 2 million tons, so huge increase.

The other traditional importers would be Russiaand Ukraine andsome of the countries to the East; Egypt,Turkey are someof the countries to the South and Indiahas become a larger supplier as well. Soall the traditional importers have been attracted into Europe.

I don’t know that we have seen any real impact on thosetrade flows regionally. I think the costto get material there is a lot more expensive now than it used to be, so forthose countries that have commercial business rules, which is to say mostcountries other than China, they have got to be affected by the fact that theocean freight rates are much, much higher for those that are ocean going.

Of course the euro also being much stronger, that’s alittle more attractive to the U.S. market, so no doubt some imports might haveflowed this way or are flowing towards Europe.

Where that all settles out? I am not really sure except to say that theimports from Chinain particular are way out in front of everybody else and that’s where thebiggest problem is and that’s where we are not subject to normal commercialmarket based rules. That’s where the biggest issue is and that’s why they aretricky as well.

Aldo Mazzaferro- Goldman Sachs

Can I switch gears to the iron ore just for asecond? I know I have asked you in thepast about the potential to expand iron ore in North Americaand I know it isn’t something that’s on the front burner, but is there a pointwhere the price of iron ore would justify that kind of investment and would itbe possible at some point?

John Surma

It’s getting closer to the front burner I think withStelco shortly and also with the prospect of running our other existing furnaceconfiguration a little bit higher to make sure we can support East Texas over the long term, having a somewhat steadier diet ofpellet consumption, suggests we may want to go a little bit higher. There are a couple of projects, sort of meatythings and then a couple that are more moderately sized projects that couldtake things up a measurable amount for us. We are looking at that prettyactively and are not prepared to declare our hand as yet.

But I think that’s something that deserves a close lookbecause the higher the world price goes the more competitive we become and weare very, very competitive right now. So, it’s something we are going to give a good look at.

Operator

Your next question comes from Michelle Applebaum -Applebaum Research.

MichelleApplebaum - Applebaum Research

It was good to see you last week here in Steeltown, USA.

John Surma

Thank you.

MichelleApplebaum - Applebaum Research

I appreciated that boat ride and left your salesmanalone. I don’t think anyone has been asimpressed as I have been over those last few years by all the strategic eventsthat you’ve done from buying back shares to acquiring Stelco; the wholenational thing in labor and just so much change in such a short period oftime.

I wanted to ask a little bit more of a criticalquestion, because this issue of integration gets bigger and bigger every yearwith the price increases in iron ore and coal and the other raw materials. We all know that you have this hugeadvantage.

My question for you is the tougher question which iswhen you talk to some of your peers about and try to get at some of the carbonsteel results in North America from the other companies,you find that the profitability actually doesn’t reflect that premium. Could you talk a little bit about what that’sabout and what you are doing about it?

John Surma

If I understand the question it’s really comparativeprofitability if that’s what you are asking about. We try to assess that because it’sinstructive and gives us a target to shoot for. It’s getting harder to find anything that’s directly comparable in ourNorth American flat-rolled segment There aren’t many good comparisons anymorethat we can analyze and study, we do that at a very micro level through varietyof committees ASI, AST, et cetera. Buton a company-level basis that’s become extremely difficult to do because ofjust the way things are reported by other companies, no criticismintended.

Having said that, we have objectives every year toimprove our cost position. We havecapital plans to improve our market position and we are striving to do the bestwe can do and improve our competitive position. But in terms of giving you dollars per ton for XYZ plant versus ABCplant it’s really hard to find that out. I wish I knew it, but it’s really not something we have access to.

MichelleApplebaum - Applebaum Research

Well, I am notasking at all about plants. I am askingabout overall carbon, steel flat-rolled results and I think that some of theinformation is public like metal and I think your integration is much higherthan theirs and you have been less profitable although we don’t have theirthird quarter results. Other companiesseem to talk freely -- I am talking about corporate-wide, about specialtyversus carbon -- you haven’t seen any of that so that you can compare it? So you are not aware of that?

GretchenHaggerty

I don’t thinkthey report it that way in their segment results.

MichelleApplebaum - Applebaum Research

They don’t, Imean [Middle] does, but anyway.

John Surma

I think they arereporting their -- I shouldn’t comment on this, but as I recall it is for theAmericas I think and if we had that sort of thing I would be delighted to do it, perhaps we’vejust missed it. If you have anything I wouldlike to see it.

MichelleApplebaum - Applebaum Research

I would be happy to send you what I have. Then another question, I was going to ask, Isaw price increase on CMOS pipe coming out of Sumitomo a few months ago and Inever saw any response to it. Did it notfloat?

John Surma

I am not aware of that, Michelle. We are striving to get the highest price aswe can for our product. Typically thatwas on the CMOS side, I am not aware ofwhat happened to that or where it was, which products and I am not sure wecompete in our market heads-up a whole lot with them, probably some but not awhole lot. I can’t comment really on that. I will have to look into it further.

Operator

Your next question comes from John Tumazos - JohnTumazos Independent Research.

John Tumazos -John Tumazos Independent Research

Congratulations. I have similar questions to Tim and Michelle. The productivityimprovement in the flat-rolled division, in particular, some of the finishingmill end markets were not really that dynamic like appliances for Mon Valley or tubes distributors andconstruction for Granite City or Fairfield.Detroit wasn’t that great for Great Lakes.

Were there particular facilities that had production orproductivity records and is your mix moving more toward grades of steel that noone else makes like a higher proportion ultra high strength full alloy forautomotive or things that are a little more defensive when the markets are a littlesloppy?

John Surma

A couple points John. Number one, we probably had some records at various facilities. I know in the Mon Valley we had a couple of [inaudible]that were very, very long and a couple of things at the Great Lakes.We had a variety of those but this wasn’t our highest production quarter but itwas a very balanced strong production across all the facilities and everythingran well in our operating group led by John Goodish and his team did anexcellent job with excellent safety performance, I might add. But none, as you point out, were particularlygoing gangbusters,

The markets were just okay. We had a good performance in light of justthe reasonable market conditions. Yourlatter comment I think though is revealing we do have, particularly on the autoside, an excellent position and a lot of the high strength in advanced highstrength steel which are not particularly easy to make by the way, and dorequire a lot of additional metallurgy that we have the investment in and wecan make as cost effectively as anybody. That certainly helped to keep our auto position reasonably strong inlight of the relatively languid market. But I would just say that overall things were just okay, and we ran theplants, our team ran the plants, our employees ran the plants extremely well.

Operator

Your next question comes from Charles Bradford - BradfordResearch.

Charles Bradford- Bradford Research

Apparently last week the European Union court ruledagainst you guys when it comes to the emissions in Slovakia.

John Surma

Right.

Charles Bradford- Bradford Research

They require a 25% cut in emissions effective thebeginning of next year. Apparently youwould have two choices: one is a cut production, which I doubted you are goingto do or buy emissions credits. If you want to buy those emissions credit todaywhat would it cost?

John Surma

It’s hard to answer that, Chuck because that’s just onepiece of the puzzle. I mean we continueto work through, this is a national allocation plan, we continue to workthrough that. Slovakiareceives from the EU body a certain level of allowances which then we get ourshare of and there has been a variety of discussions at the ministry level in Slovakia. We think we are moving towards the conclusionwhich will be I hope something we could live with. We are still considering our options in thatlegal action because we think both the country and we were not fairly in thatprocess and haven’t been generally.

But even if that is not successful we think that wewill be in a position where the difference between what we are going to needand what we were going to get won’t be so significant that you have tocalculate that in the overall emissions; I am forgetting now, but I think it’sroughly two tons of carbon per shipped ton roughly. I have to get the exactnumbers. You can see what the market price is for allowances these days inEurope whether it’s $10, or $20, but it’s in that order of magnitude.

Charles Bradford- Bradford Research

When you look at proposals that have been put forwardin the U.S., for example, the Jingle plan or some of the other arrangements,what do you think makes some sense considering the mini mills or emitting a lotloss carbon than you guys are?

John Surma

They are taking advantage of an extremely efficientnational recycling system we have that makes steel the most recycled materialin the world. Most of the plants we seethat right way gravitate towards cap and trade, because of our experience inEurope we don’t think it’s the right way to go. It forces someone in this case,the folks in Washington to pickwinners and losers. We don’t think theyare particularly good at that quite frankly, and I would prefer it to be asystem which is more, particularly for a global industry like ours, has a moreglobal kind of approach.

What we are most concerned about would be if in somerush to enact something it’s a cap and trade system that for some reason isapplied to industries like ours, what that would do without some other kind ofsafeguard would be to encourage production to move to other regions such as Chinawhere there are no limitations, if they don’t sign up and where the emissionsintensity is two or three times higher. So we would have succeeded in doing nothing more than damaging ournational economy and increasing carbon emissions.

We think that’s a terrible result, and we speak to anyonewho will listen to us that that’s not the right thing to do. We think the IISI,AISI sponsored global sector approach where we all work together for bestavailable technologies and reduce our overall intensity is the best way togo.

I would remind you that due in part to the electricfurnace contributors that our overall CO2 and energy intensity since 1990 in North Americais down 27%. So we’re way ahead of wherethe cumulative requirements would have been.

Operator

Your next question comes from Michael Willemse - CIBC.

Michael Willemse- CIBC

I just want to go back to a comment I think Gretchen madeat the beginning about $400 million in receivables, a facility had already beenset up with the Stelco acquisition.

GretchenHaggerty

Yes.

Michael Willemse- CIBC

Is that an off balance sheet facility?

GretchenHaggerty

Well, it’s a receivable purchase facility. You can see we had about $500 million undrawnoff balance sheet, I think is relative; it’s fully disclosed and people treatedit as debt.

Michael Willemse- CIBC

You said it was about $400 million or $500 million?

GretchenHaggerty

Well, the availability is about $500 million. We actually drew $400 million in preparationfor a closing this week, so we actually have drawn on all of the facilities andwe’re ready to go.

Michael Willemse- CIBC

And then just on the inventory levels at Stelco, do youhave an idea yet on how much you think? I mean you talked about reducinginventory at Lone Star, how much you think you could reduce inventories atStelco to get them more in line with desired levels?

John Surma

That’s hard to say at this point without really beingthere and being involved. We had abetter feeling about the ability to do that at Lone Star, because again theywere steel short and they had a long supply line, so that was, I think, muchmore apparent to us. Our sense, at least my sense at Stelco is that based onwhat we have seen so far, that the management team there, Rodney Mott and hiscolleagues, they have done a good job of running the facilities and have kept apretty good handle on inventories.

I like to think that as we get an overall larger NorthAmerican supply chain together we can do better, but I am reluctant to say howmuch in terms of percentages of dollars. That would be one of our focus areas but my sense is there it won’t beas quick and as apparent. That will bethrough normal blocking and tackling.

Michael Willemse- CIBC

On the inventory charges, purchase accounting chargesat Lone Star, do you think you will have more charges in the fourth quarter ordo you think we have ran through most of them in the third quarter?

John Surma

I’d say most, but it is not impossible that you mightsee something, We don’t come up with a lot of excuses as you guys know if it’snormal routine business stuff, that is a different question but I think themajority of the major things we had to deal with we wanted to get done becausewe told all of you we would and I think we got through most of it.

Michael Willemse- CIBC

lastly, you had announced investments in new largediameter pipe facilities in North America. I am just wondering where you are with largediameter pipe investments? I know LoneStar had been talking about one in Texas. I think that’s off the table now. What about the one on the joint venture onthe West Coast?

John Surma

I think you have that right. The one that Lone Star had underway is infact off the table. The one on the WestCoast continues. We are into theengineering phase in that process and working our way through it. It’s not quite ready to pull the trigger onit yet but we are getting close to that. So, we’re still working our way through it, just in the engineering/permittingprocess now. There was some progress on that in the last week or two Ithink. So, we think that’s one projectwith great prospects. A good partner, twogood partners actually and a good market for us, so we are excited about it.

Michael Willemse- CIBC

When do you think it could finish construction?

John Surma

That’s at least a year to year-and-a-half kind of aschedule. I am not seeing all thedetails on it yet but I would say it’s in that zone, year to year-and-a-half.

Operator

Your next question comes from Dave Martin - DeutscheBank.

Dave Martin -Deutsche Bank

First off on the comments earlier about auto contracts,can you remind us how many tons are due to be repriced for ‘08?

John Surma

I don’t know that we want to give total tons. I mean it would be either at the beginning of‘08 or some later on. It would be themajority of our overall auto book, which is probably a quarter of our overallbusinesses going to be up for repricing.

Dave Martin -Deutsche Bank

Secondly, coming back to the comments about outage costsin Europe and there have been some significant outagecosts in the recent quarters; you mentioned the major rebuild in Serbia. Are there any major rebuilds planned for 2008and what costs can I associate with the major rebuild in ‘07?

GretchenHaggerty

I don’t know that we have anything for ‘08.

John Surma

I am sure there is an easy way to characterizethat. I mean there is a certain diet ofthese things that are more routine that like we have this quarter which areeach two or three weeks each. Those arefairly steady diet of those, higher in some quarters, some quarters lower.

The major projects where we think it comes down for acomplete rebuild like we are doing in Serbiais less common and I don’t know that we are prepared to say. Those typicallyare more capital but they are much longer and in production for a lot longertime. I am not sure we can tell you thatnext year; I can’t tell you next year what exactly we are planning on doingbecause those plans are just coming together. There will undoubtedly be some outages. Some will be longer than others. We may have a project in one of the facilities furnaces in Slovakiathat will take a little bit longer but until we are actually committed to thoseI hate to get into details.

Operator

Your next question comes from Marty Pollack - NWQInvestment Management.

Marty Pollack -NWQ Investment Management

A couple of questions, there are alot of way of looking at some of your results, but as an example when I look atthe tubular your year-ago margins 36% on an operating basis; I think 24% in Q2and 12% in this quarter. Clearly therevenue impact of Lone Star is affecting margins via mix,

I am just wondering though, can yougive us a sense when we look at that whole group, is there a way to think aboutwhat would be the normal stable profits on margins here, and in fact how muchis integration costing? Trying to get a sense of may be normalized level.

GretchenHaggerty

That’s probably a hard question for us to answer rightnow Marty, because we are really sorting through a lot of transition stuff andjust trying to get the business on the model that we want going forward.

There is no question that if you just go back and youlook at Lone Star’s results and their margins prior to our acquisition, it wasa lower margin business but they also tried to sell their welded the productfor some higher, they had some higher value-added uses for that. We are just trying to pull all that togetherand hopefully raise margin overall with the general approach that we take.

The one thing about Lone Star though is that a lot ofthe synergies are liable to fall out in the flat-rolled segment. As we work through that, this year we willhave a better sense of that. So whilethere should be some margin improvement from synergies related to some of thecost synergies, purchasing synergies thinks like that, most of the sourcingbenefit is really going to be probably fall on the flat roll side and I thinkwe saw some of that in the third quarter.

So as we get through this year and maybe get a betterlook at how things are going to look going forward, we might be able to be morehelpful on that.

Marty Pollack -NWQ Investment Management

How is the integration going? Is there a sense that things are going as youexpected and possibly what would it be, if we look into next year, wouldintegration costs be tailwind of some amount?

John Surma

I think our integration has gone well and on theschedule that we have been looking for. We have a business unit established with the business unit leader,management team and the market leader, a unified approached to the market, a distributorselected in each of the major product groups; they have be notified there areon board. We are working our way throughthe supply chain as we mentioned, took out electric furnaces. We have done everything we said we are goingto do, may be a little bit faster pace than we originally laid out.

Of course, we are all viewing that through a marketpicture, which is a little bit murky. But I think we will exit this year with the business unit established,the unified market approach established, and we will be able to sail into nextyear and that will give us a much better picture as Gretchen said as to wherewe going. I think on the actualintegration plan we laid out we are on or ahead of schedule.

Marty Pollack -NWQ Investment Management

On the other side, iron ore as it affects North America and Europe, seaborne iron oretrade, I mean those price increases possibly up 50% this year or 30% or 40%,obviously can be very material. Theywould affect I would imagine your European operations in terms of the benchmarkof pricing. It seems like internationaliron ore is definitely a higher price and possibly a higher cost.

On the other side, on the North Americait seems the history, one looks at a Cliffs sort of pricing trends. It doesn’t seem that we are gaining the sametype of leverage on pricing. So that Ithink historically only a quarter of the same price increase internationallyyou are seeing domestically.

I understand since you are not really a third partyseller I am not sure whether you’re missing any benefits but are you gettingthe same cost benefits if in fact there is less volatility in those prices?

John Surma

Let me take those in reverse order. For the most part we are producing in Minnesotaour two plants over 20 million tons and consuming all that in our facilitiesand we’ll make as much as we can because our consumption is going to be a bitbigger now. Our focus there is to keepour cost as low as we possibly can and our costs next year will be I hopewithin a short distance of what our cost was this year.

While we might take some interest academically in what theCleveland Cliffs’ price would be it’s not really something of great interest tous because we are not either buying or selling in North America.

The seaborne price, the higher it goes to the extentthat it find its way into some of our competitors’ furnaces, we think that’sjust fine in North America. In Europe,I would just say Marty we don’t exactly play to the seaborne price in Europe. We are working with suppliers in the east whogenerally aren’t seaborne players and as a result our materials cost typicallywould move more aligning with spot fuel prices in Europe and less so the seaborneiron ore price.

So that’s normally how things have gone and that’s whyin this third quarter and also in the fourth quarter in Europe the overall rawmaterials prices were relatively flat because steel prices were relatively flatand the bigger increases came earlier in the year.

We are a little bit out of that seaborne price trade inthe Europe and in the North America;we will observe what happens with Hughes, but generally speaking the higher itgoes and more competitive it makes it.

Operator

Your final question comes from Bob Richard - LongbowResearch.

Bob Richard -Longbow Research

I think this may have already been touched guys butwhat’s driving the Stelco’s synergies? Is it more due to the higher utilizationof the finishing assets here in North America? It is going to add about I believe 900,000tons of slab. Are you now in balance orare you still slab short after the Stelco acquisition?

John Surma

The 900,000 by the way is our best guess so it might bea, might be a little higher, it’s hard to say it could be little bit lowerdepending on how things run in Canada, again we won’t know all that just yet. Thatadditional 900,000 tons, if we choose to finish it all in North America, whichwe would be in all probability GreatLakes and Granite City, we would had a little bit more room left in our stripmills, but not a lot. We would be getting towards the top end of what we couldhandle. There may be episodes where we can handle more, but that would notquite philosophically get us in a much, much better position of utilization.

We are not going to necessarily finish all of those;there may be other options which could be selling slabs either in North America or elsewhere. Weare looking forward to exploring all that given the macro economics, we thinkthat a nice position to be in.

Bob Richard -Longbow Research

The sale of the railroad, when is that supposed toclose?

John Surma

That’s the subject of all sorts of regulatoryrequirements that have to be carried out with Surface Transportation Board, ifthat’s the right name.

GretchenHaggerty

Right.

John Surma

That in all probability will be well into mid next yearbefore that would be finished.

Bob Richard -Longbow Research

That’s going to be a material gain, I would have guessed,right? I can’t imagine the book value ofthose assets being all that much?

John Surma

I think your guess is a good one. Of course the reason for that, I think it’squite a fair value for our shareholders and we have things we can do with thatcapital and having an excellent service provider to give us the kind of servicewe need and just made the right thing to do, but it will be a substantial gain,you are right.

Nick Harper

With that, we thank everyone for participating andwe’ll talk to you next quarter.

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